Political Competition and the Limits of Political Compromise

43 Pages Posted: 7 May 2014

See all articles by Alexandre B Cunha

Alexandre B Cunha

Universidade Federal do Rio de Janeiro (UFRJ) - Institute of Economics

Emanuel Ornelas

Sao Paulo School of Economics

Date Written: April 5, 2014

Abstract

We consider an economy where competing political parties alternate in office. Due to rent-seeking motives, incumbents have an incentive to set public expenditures above the socially optimum level. Parties cannot commit to future policies, but they can forge a political compromise where each party curbs excessive spending when in office if it expects future governments to do the same. We find that if the government cannot manipulate state variables, more intense political competition fosters a compromise that yields better outcomes, potentially even the first best. By contrast, if the government can issue debt, vigorous political competition can render a compromise unsustainable and drive the economy to a low-welfare, high-debt, long-run trap. Our analysis thus suggests a legislative tradeoff between restricting political competition and constraining the ability of governments to issue debt.

Keywords: political turnover, efficient policies, public debt

JEL Classification: E610, E620, H300, H630

Suggested Citation

Cunha, Alexandre B and Ornelas, Emanuel, Political Competition and the Limits of Political Compromise (April 5, 2014). CESifo Working Paper Series No. 4737, Available at SSRN: https://ssrn.com/abstract=2432910 or http://dx.doi.org/10.2139/ssrn.2432910

Alexandre B Cunha

Universidade Federal do Rio de Janeiro (UFRJ) - Institute of Economics ( email )

Rio de Janeiro, 22 290 080
Brazil

Emanuel Ornelas (Contact Author)

Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://https://sites.google.com/site/emanuelornelaseo/

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